Short and Long Term Investors (and Other Stakeholders Too): Must (and Do) Their Interests Conflict?

In this chapter for an edited volume, we review and analyze theoretical and empirical questions raised by the ongoing debate over whether American public corporations face undue legal and market pressure to pursue short term profits. Orthodox theory holds that the highest ‘bucks’ should not necessarily be the ‘quickest’ – that is, that markets correctly value a company’s prospects, no matter how far in the future they are. Of course, given the time value of money, a long-term prospect has to be much better than a short-term one to be worthwhile. But the argument made with respect to shareholder activists, and to a lesser but still considerable degree corporate raiders, was that cost-cutting was being encouraged even if doing so saved less than the discounted value foregone.This argument is not consistent with orthodox theory. Here, we explain why this is so, consider reasons why that theory might be wrong, and make some suggestions for ways to proceed. In our view, there is plausible, and perhaps sufficient, evidence of a problem from shareholders’ perspective – corporations may indeed be shunning some potentially higher-yielding long-term strategies, emphasizing instead the short-term strategies that yield cash and savings in the short term. There may be a problem from the societal perspective as well, which is separate from but related to the question of short-term strategies. The market may be addressing the shareholder problem, although perhaps not sufficiently, and probably not sufficiently quickly. The societal problem, the underprovision of public goods, and the imposition of negative externalities, is far trickier to address. We offer some suggestions which might help on both fronts. That being said, in some cases, the conflict between a shareholder value maximization perspective and a societal perspective may be intractable.